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Building brands in China

2006 s p eci al edi t i on


Article at a glance
Chinese shoppers love brand names, but companies are having a difficult
time translating these preferences into revenues, in the form of either increased
market share or premium prices. But our market research suggests ways for
companies to turn consumers into loyal customers.
Salespeople in China have tremendous sway over the decisions of customers.
Point-of-sale promotions can be an effective way of addressing last-minute switching
and getting products into the hands of consumers.
Compared with developed markets, messages that focus on functional features
can be more important in China, since many product categories are new.
This preference will probably change as shoppers become more experienced, but
the pace will vary from one product to the next.
Consumers in China also have strong national pride, so multinational companies
could lose important segments by seeming too foreign.
Building brands in China 35
Kevin P. Lane, Ian St-Maurice, and Claudia Sssmuth Dyckerhoff
The streets of Chinas cities are alight with neon touting brand names
from all over the world. Consumers eagerly trawl these markets, picking
up Nike shoes, Samsung mobile phones, Haier home appliances, and many
other top-label products. Our research shows that the Chinese consumer
is enamored of brands. In categories such as consumer electronics and food
and beverages, more than 80 percent of the respondents to a survey
1
said
that they buy name brands at least occasionally. Whats more, 69 percent
would buy more branded gear if they had enough money, as compared with
about 57 percent in the United Kingdom and the United States.
For marketers, the problem is that despite this infatuation with brands,
Chinese consumers dont consistently buy the same ones or even those they
prefer. Price differences and point-of-sale marketing vehicles can change
a consumers behavior in a heartbeat. Asked to choose among three lead-
ing television brandstwo foreign and one domestic49 percent of the
survey respondents said they would pick Sony if prices were similar. But
Building brands in China
Chinese shoppers love brands but dont purchase them consistently.
Market research shows the way forward.


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1
We interviewed about 6,000 individuals in households throughout China, from the largest cities to semirural
communities.
The McKinsey Quarterly 2006 special edition: Serving the new Chinese consumer 36
our analysis shows that a Sony
premium of just 10 percent over the
price of a TV from Changhong
(a leading domestic brand) could
make about a third of the people
who say they prefer Sony choose its
Chinese rival instead. In developed
markets, companies that enjoy the
level of brand preference that Sony
TVs garner in China can routinely
charge price premiums of up to
40 percent. And consumer electron-
ics had some of the highest brand
preference and loyalty scores among
all the categories in our Chinese
survey.
Chinese consumers often change
their minds at the last minute,
responding to in-store promotions
or a salespersons suggestion. Of
our respondents, 65 percent said
that they often leave a store with
a different brand than the one they
intended to purchase. Just as many said they almost always buy whats on
sale, even if its not their favorite brand.
Such attitudes toward price and in-store promotions create a transactional
relationship between consumers and brands. No matter what brand
preferences a consumer takes into a store, theres no certainty about which
brand will actually get the nod. The result is a roller-coaster ride: market
share in China can rise abruptly and then plummet. In 2002, for example,
Motorola and Nokia commanded about 40 percent of the Chinese market
for mobile-phone handsets. By 2003, despite a very strong reputation among
consumers, their combined share had dropped to less than 30 percent
as buyers switched to cheaper domestic brands. By 2005 Motorola and
Nokia had regained market leadership. Several factors infuenced the
shift, but the speed of the change is a clear sign of the fckle attitudes of
Chinas consumers and the diffculty of turning preferences into revenues.
Brand loyalty, it seems, is not only generally low but also varies considerably
from one product category to the next in ways that could surprise compa-
nies accustomed to developed markets. Loyalty scores in China, for example,
Building brands in China 37
are about 50 percent higher for consumer electronics than for fast-moving
consumer goods such as soft drinks and personal-care items. US consumers,
by contrast, are much more loyal to sodas and other everyday purchases
than to consumer electronics. One reason for the difference is that the price
of a television, say, represents a greater share of a familys income in China
than in the United States. Lower-priced products give the Chinese room to
sample a broader selection of newly available offerings, and the wide
range of products encourages experimentation rather than loyalty, while in
developed markets the novelty has worn off and consumers have already
settled on their favorites.
Given the fexible attitude of many Chinese consumers, how should market-
ers build their brands? Our research revealed the potential of point-of-
sale marketing techniques. We also found that many consumers respond to
appeals that highlight functional attributes (such as performance features)
for some products and to nationalistic appeals for others. Knowing which
button to push, and when, could encourage greater brand loyalty.
The importance of point-of-sale marketing
Advertising revenues at CCTV, Chinas national television network, more
than doubled from 2000 to 2005, jumping to 12.4 billion renminbi, from
5.29 billion. The problem is that many Chinese consumers are tuning out
this bombardment of marketing messages and now resist them even more
fercely than people in Western markets do. To give one example, in 2004
Chinese television viewers left the room or changed channels 72 percent of
the time when ads were airedmore than viewers in other major countries
compared with 42 percent in 1999.
2

Companies must advertise in the mass media, but they can do more. Our
research shows that many Chinese consumers make up their minds just
before they get to the cashier and can be swayed at the last moment. While
there is substantial variance by product category, in general companies
should consider rebalancing their approach to marketing, with a greater
emphasis on below-the-line approaches, such as price promotions and
in-store demonstrations, than they might have in developed markets.
We looked at 40 domestic and foreign brands in fast-moving consumer
goods such as soda, diapers, and toothpaste. On average, only about one
in three consumers who considered buying a brand currently uses it.
The falloff was even steeper in the consumer electronics category: on average,
fewer than one in four consumers who considered purchasing a brand
2
Ad Avoidance Survey, Lowe & Partners Worldwide.
The McKinsey Quarterly 2006 special edition: Serving the new Chinese consumer 38
actually owns it (exhibit). In both cases, the current use rate was much
lower than companies have come to expect in developed markets. High prices
cause some of this leakage, but our study shows that last-minute switch-
ing explains much of it. Even if consumers consider themselves loyal to a
brand, salespeople can get them to put a different one into their shopping
baskets up to half of the time. In some cases, we have seen the infuence of
salespeople outweigh advice from medical professionals.
Companies must get their retail execution right to improve their point-
of-sale performance: well-trained and disciplined salespeople must go into
stores and make sure that the retailers understand the product, that it
is getting the promised shelf space, and even that the packages on display
have been dusted. In developed markets companies can rely on their
distributors to do this sort of work, but in China distributors generally
dont yet have the skills or infuence needed for it. As a result, piled-up
boxes may hide modern display racks, and layers of grime may obscure the
brightest packaging.
Although in-store activities are common (and of growing importance) in
developed markets, they are generally focused on a narrow range of new or
improved products. In China, low labor costs allow companies to stretch
their point-of-sale efforts across a broader range of products. Promotional
staff in selected stores can literally put a product into the hands of con-
sumers and explain its benefts.
r x n i v i 1
Relatively few people progress to the purchasing stage
Q2a 2006
Branding
Exhibit 1 of 1
Glance: Few Chinese customers who considered buying a brand actually went ahead and did so.
Average of 40
fast-moving-
consumer-goods
brands surveyed
Awareness Familiarity Consideration Trial
1
Purchase
1
Loyalty
Chinese consumers who moved to next stage of purchasing
Average of 42
consumer
electronics brands
surveyed
74 57 41 34 16 6
xx Number of consumers
% of consumers xx
Purchasing funnel
77 72 83 47 39
84 58 23 7 5 3
69 39 31 66 67
i
1iial = consumei uiclaseu iouucr once Lur uoes nor conrinue ro use, uiclase = consumei conrinues ro uiclase, use iouucr.
Souice: Ser zooj NcKinsey inreivievs virl -6,ooo inuiviuuals in Clinese louselolus
Building brands in China 39
The importance of function
A lot of Chinese consumers attach importance to functional attributes in
many product categories. In our survey 83 percent of the respondents
liked name-brand clothes because they perceived the quality to be better;
by contrast only 65 percent said that branded clothes made them feel
better. The gap is larger than would be expected in developed markets, where
the range of functional differences among brands has shrunk over the
past two decades for many categories
3
and consumers are more likely to be
hooked by emotional imagery such as sophistication, coolness, or just
feeling good. Why the difference? Perhaps because many products that
are common in developed markets are only now being introduced to
China, where consumers are still learning their value.
Johnson & Johnson, for instance, focuses heavily on the functional bene-
fts of its o.b. brand of tamponsusing techniques such as advertisements
that feature a prominent doctor
explaining at length how, when, and
why to use the product. Tampons
(along with shampoo and cosmetics,
among other products) were not
available to most Chinese until the
1980s. But the rules can change
quickly. In hair care products P&G is shifting its marketing for Head &
Shoulders shampoo, especially in the bigger cities, from fghting dandruff
to new life for hair.
As Chinas consumer markets mature and the differences in quality among
brands become less perceptible, emotional appeals will probably increase in
importance. But the pace and extent of the change will vary widely
among product categories and consumer segments. Companies will need
high-quality consumer research to detect such trends.
A nationalistic streak
China is bursting with national pride, which is refected in consumer atti-
tudes toward domestic brands. In our survey 86 percent of the respondents
claim to trust them, compared with 53 percent who trust foreign ones.
4

In some categories the preference for Chinese brands is much stronger:
87 percent, for example, say that they trust local brands for food, as against
20 percent who trust foreign brands. Although all age groups express
greater trust in Chinese brands than in foreign ones, younger adults trust
3
David Court, Thomas D. French, Tim I. McGuire, and Michael Partington, Marketing in 3-D,
The McKinsey Quarterly, 1999 Number 4, pp. 617 (www.mckinseyquarterly.com/links/22073).
4
Respondents could declare their trust in both domestic and foreign brands.
Many products common in the
developed world are only now being
sold in China, where consumers
are still learning their value
The McKinsey Quarterly 2006 special edition: Serving the new Chinese consumer 40
the former relatively less and the latter
relatively moreperhaps because they are
more exposed to categories such as mobile
phones, where foreign companies have
a stronger presence. (Teens show the great-
est trust for domestic brands, possibly
because Chinas fortunes have risen rapidly
during their lifetimes. See Understand-
ing Chinas teen consumers, in this issue.)
Global companies must understand
these tendencies and tailor their brands to
targeted segments or risk appearing
too foreign.
Multinationals have boosted their local credentials through package and
product redesignsfor instance, by offering red-bean ice cream and
prawn-favored potato chips or getting endorsements from Chinese sports
heroes, such as basketball star Yao Ming and Olympic medalist Liu Xiang.
Domestic companies cater to national pride by emphasizing their emergence
on the global stage: for example, the Chinese computer maker Lenovo,
for its Chinese-language home page, selected a world map with pictures of
its PC towering over landmarks including the Statue of Liberty, the
Eiffel Tower, and the Sydney Opera House. The slogan In step with global
technology accompanies the image.
The Chinese market is a moving target, and continued change is the only
thing a company can count on when planning its brand strategy. Some
consumer segments will mature rapidly, especially in the biggest cities, and
shoppers could quickly become loyal to specifc brands. But as income
levels rise across China, a continuing infux of new consumers will be frst-
time buyers of many products and eager to try new brands.
Meanwhile, new competitorsboth multinational and domesticwill be
entering the market. Only a few brands in each category will succeed in
commanding premiums, which (at least for the next few years) will seem
razor thin as compared with those in other markets, though volumes can
be immense. Channels will also proliferate as modern retail formats spread
further from the big cities and Chinese buyers become accustomed to
catalog and online shopping and to direct sales.
Building brands in China 41
To foster the distinct brand image and consumer loyalty that can generate
higher sales and profts in the face of such fuidity, companies must
continually reassess their targeted segments and marketing strategy and
then focus on the factors that drive purchasing decisions. Its a tough
job, but also a unique opportunity to develop and shape brands for an
enormous market.
Q
The authors wish to acknowledge the contributions of Amy Jin, Claudia Wu, Cathy Wu,
Cherie Zhang, and Ming Zhang.

Kevin Lane and Claudia Sssmuth Dyckerhoff


are principals in McKinseys Shanghai offce, where Ian St-Maurice is an
associate principal. Copyright 2006 McKinsey & Company.
All rights reserved.
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